U.S. equities are on pace to gain more than 20% in 2021, and it’s been one of the smoothest rides in recent memory.

The easy-riding escalator to no-stress returns was briefly interrupted in September, when the S&P 500 fell 6%. But it quickly regained its climb to new highs early in December.

You may believe such an easy ride means a major pullback is imminent. Yet different sectors and investment “themes” have already pulled back, and you may not have noticed.

The volatility below the surface has been hidden by the massive market-cap weightings at the top of the benchmarks. A reminder that five companies — Apple, Microsoft, Alphabet, Amazon and Tesla — comprise nearly a quarter of the S&P 500. Those fab five stocks have gained an average of 40% year-to-date.

For many of the 495 others, things haven’t been quite as pleasant. At the tail end of September, half the stocks in the S&P 500 had lost 10% or more from their 52-week highs. More than 60 stocks lost at least 20%.

Some trends observed in recent months add helpful perspective as we look ahead to 2022.

Trend 1

Small cap equities have sold off more than large caps. The Russell 2000 index is down roughly 12% since early November, compared to pullbacks around 3% for the Dow and S&P. Small-caps have been punished since discovery of the omicron variant further threatened our economic recovery. Those concerns seem overblown, however, given Americans’ higher vaccination rates and the general comfort level among consumers to live, shop and travel more normally compared to earlier stages of the pandemic.

Trend 2

High-risk asset classes are losing their appeal. Earlier this year, “meme stocks” like GameStop and AMC Entertainment offered triple digits returns to those lucky enough to time it right. Most of these have fallen hard in the last six weeks. A group of 37 such companies tracked by Bloomberg trades near its lowest point since January. Bitcoin, the poster child for cryptocurrencies, has lost a third of its value since early November.

Trend 3

The Fed’s willingness to talk hawkish. Less stimulus and a higher federal funds rate are both coming in 2022. Fed policy will not be restrictive, but the trend toward tighter policy likely coincides with a change in investor sentiment. This should benefit investment strategies that prioritize stocks with attractive valuations more than just growth at any cost.

Most Wall Street outlooks for the year ahead predict a more challenging path for stocks. That seems reasonable given higher valuations, less favorable Fed policy and higher inflation. “Challenging,” of course, is not synonymous with “negative.”

Corporate earnings continue to impress, and wage growth should promote higher consumer spending.

The macro environment remains strong, but it seems reasonable that the froth will come off speculative securities (i.e. crypto, meme stocks, story stocks), and equities trading at silly valuations could be punished in the months ahead.

Meanwhile, high quality stocks with more reasonable valuations, and business models that have pricing power, should be good bets.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.